Teresa GhilarducciOn May 21, 2014, I testified before the U.S. Senate Subcommittee on Social Security, Pensions, and Family Policy at a hearing titled, "Strengthening Social Security to Meet the Needs of Tomorrow's Retirees." I submitted an oral and written statement on how the retirement crisis exacerbates inequality.

The hearing is broadcast online. Below is an excerpt from my comments.

"The current voluntary, self-directed, liquid, commercial retirement account system relies on generous tax subsidies and is stacked against workers for five reasons.

  1. Nearly half of workers have no plan at work because the system is voluntary. Only 53% of the workforce have any kind of retirement plan at work, which is down from 60% 10 years ago.
  2. Middle class workers are more likely to take out loans or withdraw money before retirement from their 401(k) or IRA's than the highest income workers. Many workers use their retirement accounts as savings accounts. A 30-year-old who cashes out a $16,000 account will be losing an estimated $470 a month at age 67.
  3. Tax deductions create more inequality in unintended and perverse ways. Two people can save exactly the same amount in their 401(k) plans and IRAs, but the higher earner will get a larger tax deduction and therefore a higher rate of return on their savings. Over just a few years this differential multiplies exponentially so the system unintentionally penalizes middle and lower income savers.
  4. Lower income workers have more conservative portfolios, which is rational, but those portfolios earn less overtime.
  5. Middle and lower income savers pay higher fees; they don't enjoy scale economies in fund management."